Bitcoin for beginners (and MMMers)

On a traffic laden Tuesday, when the sky seemed a bit undecided, swinging between the sunshine and rain, a man was preaching about Bitcoin and its ‘magical powers’. Since I was struggling to stay awake in that sleep enhancing weather, I missed the first part of the message. However, at the mention of the miraculous power of this coin to make one recession-immune, my grogginess disappeared.

The Bitcoin evangelist continued reeling out examples. The one that stood out in my memory was the testimony of how a man used a few Bitcoins to purchase a land in Ajah, Lagos. Wow! After 30 minutes of testifying, he asked all those who might be interested in knowing more to call a number and that registration for its training costs just a token.

It is interesting to note that Bitcoin is not only trending in Nigeria, there have been several questions on Quora about it. This suggests a misunderstanding or outright ignorance of the concept and its proposed benefits.

Since a ‘token’ may rank between a few hundreds to several thousands of precious Naira in present economic situation, this explainer may come in handy for the interested and MMMers (who allegedly, will be paid in Bitcoins).

What is Bitcoin?

It is also known as internet money, a digital currency that can be used to conduct business outside the typical financial system. It is not printed. It is more like “cash for the internet”. This means that it is not controlled by banks or the government.

It was first processed in 2009, by an anonymous person using the alias Satoshi Nakamoto.

How is it produced?

Bitcoin mining

While conventional currencies may be mined in gold, silver or copper, Bitcoin is not physically printed. It is produced based on a network of open source software programs which follow a mathematical formula.

How does it work?

To get started, one has to install a Bitcoin wallet (kind of the equivalent of a bank account) on a computer or mobile phone. It will give you a Bitcoin address, which should only be used once. This address can be shared with your friends so that they can pay you or the other way round. The wallet keeps a private key, which is used to sign transactions. The private key provides a mathematical proof that the transactions were performed by the owner of the wallet.

Once a transaction is signed, it is broadcast between users and will be confirmed in 10 minutes by the network.

The challenge with digital currency

Imagine this; I just downloaded Olamide’s hottest single on my phone and you want to have it too. I send you the track via Bluetooth, so you now own the song right? Yes, you do, but I still have a copy on my phone too. I can send the same track in the same way to Toyin, Chidinma and Hauwa without losing the version on my phone.

Now imagine the same scenario for a financial transaction. Say I sent you the equivalent of  ₦1 million in digital money to pay for a service you rendered, how can you be sure I’m not creating and sending copies of the same amount to everyone else? That would give me practically unlimited purchasing power.

So how do ensure that this does not happen?

All Bitcoin operators use a shared public triple entry ledger known as the blockchain. Every transaction is contained in the blockchain. Entries in the block chain are entered in a chronological order and it is enforced with cryptography, which ensures transparency and authenticity. It is like a ledger.

A physical ledger

Remember what ledgers are? For those that don’t, it is a book used by accountants where records of money received or money spent is recorded. In real life, when the money spent does not belong to you anymore, however, it is not that simple digitally without the threat of duplicity.

Therefore, the transaction between you and I would have been recorded in the blockchain, so it no longer belongs to me. The blockchain is shared publicly so I cannot lie or be fraudulent with the track.

What is the value of Bitcoin in Nigeria?

According to BTC Nigeria, a Bitcoin-focused newspaper, on January 18, 2017, one Bitcoin was worth $895.26, which is equivalent to ₦284,304.93.  On its website, BTC advocates for bitcoin, calling it “a high-profit investment.”

Last year 5 Bitcoins was worth $1,000, because each Bitcoin was about $200. The equivalent Naira rate for 5 Bitcoins was about ₦220,00 because each dollar was worth $220 on the black market. Fast forward a year later, the same number of Bitcoins now worth about $2,915 since the value of each bitcoin has gone up from $200 to about $583, and the equivalent Naira rate for 5 Bitcoins would now be ₦1,078,550. Can you imagine the profit margin.

How can I get Bitcoin in Nigeria?

There are a couple of websites that claim to ‘sell’ the Bitcoin. A few are nairaex.com, localbitcoins.com, nairaswitch.com among others.

How do I spend my Bitcoin in Nigeria?

CNN money claims that Bitcoin can be used to buy pizza, web hosting services and manicures. However, apart from the man I heard on the radio who claimed that one can “buy land with Bitcoin in Ajah”, there seems to be no other place where this internet money can be spent.

Disclaimer

While Bitcoin seem to be the rave of the moment, the Central Bank of Nigeria has warned citizens to be wary of virtual currencies.

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Are you selling something we can buy with Bitcoin? Let us know in the comment section.

Source:TechPoint

Wall Street Journal Investment Observer Wary Of Bitcoin IRA

As bitcoin has gained attention as an asset, more people are considering it as an investment for retirement. The Bitcoin IRA came into being last year, a tool that can provide direct ownership in bitcoin. Jason Zweig, the author of The Wall Street Journal’s “The Intelligent Investor,” explored, in a recent article, using bitcoin as a retirement investment and concluded that people should be wary on account of the cryptocurrency’s volatility.

Had someone invested $5,000 in bitcoin at the end of 2011, that amount would be worth just under $1.2 million earlier this month when bitcoin reached its peak. In the past nine days, however, bitcoin lost more than 28%.

Bitcoin’s Investment Benefits

Among the experts Zweig interviewed, some pointed out that bitcoin’s change in value is not tied to the same factors affecting more traditional assets.

Edmund C. Moy, the former director of the U.S. Mint and Bitcoin IRA’s chief strategist, said all investors with retirement accounts should consider a bitcoin IRA since its movement is not correlated to the same factors affecting the U.S. dollar.

Because bitcoin is not part of the conventional financial system, it will not move up or down with the rest of an investment portfolio. For this reason, bitcoin is not extremely risky, according to Campbell Harvey, a Duke University finance professor. Should the stock market crash, bitcoin has no reason to crash with it, Harvey said.

The correlation between bitcoin and other assets could even be negative should a geopolitical disaster raise bitcoin’s demand, Harvey said.

Volatility Still An Issue

Nevertheless, bitcoin remains wildly volatile less than a decade after it was conceived. The price still moves up and down as regulators threaten to regulate trading, hackers continue to steal bitcoins, and investors move in and out of the market.

Since January 2012, bitcoin has fallen at least 10% in a single day 28 times, Harvey noted. By comparison, the U.S. stock market has lost over 10% in one day only once since 1957 – on Oct. 19, 1987. Harvey said bitcoin is at least five times more volatile than U.S. stock market indexes.

Wade Pfau, an American College of Financial Services professor of retirement income, said such volatility can be problematic for an IRA. Once a person retires, they go from saving to withdrawing money. Should one withdraw when the market value has taken a dive, the losses are locked in, making the money less likely to sustain itself through retirement.

Pfau, running a computer simulation for bitcoin’s past returns, estimated there is a one in 10 chance an investor could withdraw at least 4% of the portfolio’s value annually, which is a common standard for funding retirement.

Since bitcoin fluctuates so wildly, one cannot plan for a withdrawal rate of much more than zero percent, Pfau said. Should one withdraw money, there is a high chance of ending up with nothing.

Moy said bitcoin’s volatility should decline as it becomes more widely used.

Also read: Bitcoin IRA launches new IRA calculator tool for investors

Investors Urged To Use Caution

Zweig concluded that at the present time, Bitcoin IRA is a costly bet. He noted the company charges a flat 15% set-up charge. This translates to $750 for a $5,000 investment to cover buying the bitcoins, placing them in a wallet and having a custodian keep them, according to Chris Kline, chief operating officer.

Taxes also need to be considered. Any increase in the value of assets in a traditional IRA accrues tax deferred, but it is taxed upon withdrawal at the ordinary income rate of up to around 40 percent. Non-IRA appreciation is taxed at capital gains rates, which are around 24% maximum.

Should bitcoin jump in value, the IRA investor could end up with a much bigger tax obligation than from a non-IRA account. Adam Chodorow, an Arizona State University tax law professor, said the difference could “swamp” any tax savings from the initial contribution deductions to the IRA.

This tax bite could be avoided by holding bitcoin in a Roth IRA, which offers tax-free withdrawals. Kline noted, however, that 70% of Bitcoin IRA investors have opted for the traditional IRA, not the Roth version.

Moy himself has opted for the traditional IRA. He said he has about 5% of his retirement savings in a bitcoin IRA as an insurance plan to offset losses on dollar-denominated assets.

Such assurance is speculation in its own right, according to Zweig. It could pay off, but it could also end in a complete loss.

Source: cryptocoinsnews